Apple to Give Pegatron a Slice of Its China Pie

Apple's reported decision to give Pegatron a share of the iPhone manufacturing action could mean it's distancing itself -- ever so slightly -- from Foxconn, which has been a hotbed of labor troubles. On the other hand, moving production among Chinese suppliers may be just a prelude to a much bigger move -- one to the U.S. -- suggested analyst Trip Chowdhry.

Foxconn, a supplier that has occasionally embarrassed Apple, will no longer be the exclusive maker of the iPhone and iPad.

More work will be funneled to another Chinese electronics firm, Pegatron, according to a report in
The Wall Street Journal.

The shift of product to Pegatron began in 2011, when some iPhone business was awarded the company. Last year, Apple chose Pegatron to fill its retail channel with iPad minis.

Foxconn has been a controversial Apple supplier. Its labor practices and working conditions allegedly have driven people to suicide. That perception -- plus reports of students being exploited as low-wage laborers -- has garnered bad publicity for the company and tarnished its shine.

Pegatron hasn't been immune from bad press either. It made headlines in 2011 when an explosion at one of its factories injured dozens of workers.

Capable Company

While Foxconn's public image could have played a small part in Apple's decision to seek out another assembler for some of its products, the major reason for the move is that it doesn't want all its pomes in one basket.

"They just want to hedge their bets and spread the work around," IDC analyst Bob O'Donnell told MacNewsWorld.

That's what most vendors do, so Apple was a maverick by sending all its work to Foxconn all these years, he continued.

Dell, HP and others divvy up their OEM business across a handful of big players, noted O'Donnell. "Apple was the unusual one in not doing that."

As for Pegatron, "it's a very capable company," O'Donnell observed.

Bad Publicity

One possible reason Apple chose to have Foxconn monopolize iPhone and iPad production may have been to ensure secrecy.

"Apple wants to maintain as much privacy and control as they can," O'Donnell said. "As soon as you start spreading work around, more people know what's going on, so there's a greater risk of leaks."

That desire for secrecy has to be balanced against the business risks of what can happen when a supply chain isn't diversified, however -- and apparently diversification, finally won out.

Foxconn's publicity problems probably had some influence on Apple's decision to diversify at this time.

"If everything was perfect, I'm sure Apple wouldn't have changed it," O'Donnell acknowledged. "It has to have been a factor, but we'll never really know."

Back in the USA

Moving production among Chinese suppliers may be just a prelude to a much bigger move -- one to the U.S. -- suggested Trip Chowdhry, managing director for equity research at Global Equities Research.

"The days of manufacturing a product exclusively in China are over. Manufacturing is going to be done where the customers are," he told MacNewsWorld.

"We're entering an era of distributed manufacturing," he said. "Apple will not only be manufacturing products in Taiwan but in the USA also."

Apple has already started that trend by manufacturing iMacs in the U.S., he said. The trend has also touched the automotive industry through Tesla.

Also, Apple rival Google announced this week that it would producing a Motorola smartphone line in a new facility in Texas.

"Tesla has told the world, including Apple, that manufacturing can be done here in a most cost-effective manner," Chowdhry said.

Pizza From Italy

Pegatron is just a small part of Apple's shift in manufacturing strategy. That shift means Apple will manufacture where the customers are, according to Chowdhry.

"The days of manufacturing in one country and distributing all over the world from that country are over," he said.

That trend, in part, is being driven by customer satisfaction.

"If you're starving, do you want to place your order for a pizza that's going to take three weeks to arrive from Italy?" Chowdhry asked.